Chinese Investment in Australian Mining: ResourceCo Advisory

Background and Context

Australia has always been a supporter of foreign investment, with successive governments recognizing the vital role that foreign investment plays in supporting the nation's economic growth. Foreign investment provides local jobs while increasing exports and helping maintain a healthy trade balance. At the end of 2007, the total stock of foreign investment in Australia was $1.6 trillion.¹ This level of foreign investment is founded in large measure on the government's consistent backing of trade liberalization agreements. The country has consistently supported the World Trade Organization along with regional trade agreements, and has been especially active in promoting trade and investment in the Asia-Pacific region as the most rapidly growing economic region internationally.²

That said, while foreign investment is certainly welcome in Australia, this is not uniformly true, nor is it the case that all foreign investment will be equally profitable. Any company considering a major investment in Australian industries must therefore be evaluated against the specific conditions of the potential investment. While foreign investors should feel encouraged to investigate potential joint projects with Australian firms, they should do so cautiously.

This memorandum is intended to provide advice to the board of ResourceCo, a Chinese firm that is interested in investing in Australian Ore Ltd., a mining company with ore holdings in both nickel and iron. There are a number of key issues to be considered by ResourceCo:

1) The current climate for foreign investment in the Australian mining sector.

2) The relevance of the proximity of a military base — and thus of sensitive national interests — adjacent to the mining holdings of the Australian company in question.

3) The connection between ResourceCo and the Chinese government.

Australian Receptivity to Chinese Investment During the Current Economic Climate

Former Australian Treasurer John Dawkins, in a speech in February 2009, encouraged Chinese investors to consider the Australian mining industry while also advising them to proceed carefully in evaluating any such investment. Dawkins noted that the recession had been especially brutal for Australian mining firms: "Many of Australia's smaller mining enterprises, denied their normal credit facilities, have been driven to their knees, while even the 'blue chip' performers on the Australian Stock Exchange have found themselves in very hard times with their shareholders."³

The problems facing Australian mining companies make them appealing investment targets for Chinese companies, as well as firms from other nations. The relatively depressed price of stock in Australian mining firms may be seen as a "pull" factor encouraging Chinese companies to look to Australia, particularly in Southern Australia.

There is also a "push" factor to be considered, and this is of course a significant part of the reason the board of ResourceCo is interested in this acquisition: Chinese firms need the raw materials that Australian mines can provide. As Dawkins described the situation:

"China has not, of course, as you all know better than I do, managed to remain immune from the effects of plunging world markets for products which it is used to exporting in big volumes. We won't speak today about food and other consumer exports sold in the world's supermarkets, which represent another complex chapter. Particularly relevant to our discussion, however, is the global metals market, where demand for a wide range of more durable consumer products in the world's developed economies has slumped dramatically. Chinese steel mills are feeling the crunch from this as well as from their own economy's flagging demand for steel in the construction industry. Look out the window in many parts of Beijing and skeletons of half-finished buildings with not a worker in sight will meet the eye."⁴

This combination of pull and push factors would be the key drivers in a perfectly free market. However, that is not the case here, given the restrictions on foreign investment and the complications arising from Australia's national interests.

Dawkins noted that Australian officials — and especially members of the Foreign Investment Review Board (FIRB) — are right to be cautious in their assessment of any proposal made by Chinese corporations interested in the mining sector. This unease is rooted in significant cultural and social factors. Mining has been a central industry for Australia, and national officials are therefore especially sensitive to foreign investment in this arena. This is both an economic concern and what might be called a psychological one: Australians feel a strong sense of ownership over their mining interests and are consequently less receptive to foreign investment in this sector than in others, such as agriculture.

Chinese assertions about the importance of Australian mineral deposits to their own industry are only likely to heighten that anxiety. Dawkins cited the following as an illustrative example:

"In November China pressed forward with a number of 'first 30 percent' initiatives, to take advantage of an opportunity to obtain or strengthen equity positions within Australian mining enterprises, both minerals and coal, at historically low prices.... At the globally significant China Mining Conference in Beijing in mid-November a Chinese official, fielding questions after a related presentation, stated publicly that responding quickly to such opportunities offered by financially weakened minerals and metals suppliers around the world was not only clearly in the interests of individual Chinese firms but was also 'their national duty.'"

While Chinese corporate leaders are perfectly entitled to make such claims, it is entirely reasonable that Australian officials would be made uneasy by such an attitude. While those feelings on the part of any government official must be considered extra-legal, they are directly relevant to any proposed investment.

Certainly, any investment strategy must first address what is permitted by law, and the relevant legal issues are explored below. However, ResourceCo must also consider how smoothly an investment might proceed. If significant resistance from FIRB or other government offices were likely, ResourceCo might well reconsider the acquisition. ResourceCo officials may not wish to proceed at all without something close to an assurance that the deal would be approved expeditiously.